Insider trading: What's the fallout of Rajaratnam sentence?

Raj Rajaratnam, co-founder of Galleon Group LLC, leaves Federal Court after his sentencing on Thursday. His 11-year sentence for insider trading was lighter than expected, but still sends a strong message to Wall Street.

Jin Lee/AP

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By most counts, Raj Rajaratnam got a lighter-than -expected sentence for his insider trading conviction back in May. But his 11-year sentence and $10 million fine, handed down Thursday, was another potent reminder for Wall Street about the dangers of dabbling in white-collar crime, even victimless white-collar crime.

"Most people were expecting a slightly longer sentence," says Robert Mintz, a former prosecutor and head of the white collar criminal defense practice at McCarter & English, a large law firm with offices in Newark, N.J., Boston, and elsewhere. Nevertheless, “it sends a very serious signal that those who are inclined to game the system are going to get caught."

"Eleven years is a tremendous amount of jail time," says Stuart Slotnick, a managing partner at Buchanan Ingersoll & Rooney in New York. The sentence is particularly noteworthy since insider trading "is as close to a victimless crime as possible."

While Mr. Rajaratnam's 11-year sentence is the longest handed down solely for insider-trading charges, it's far less than the 20 to 24 years that the prosecution wanted. Nor does it match the 24-year sentence imposed on Enron CEO Jeffrey Skilling, who was convicted of insider-trading as well as other crimes in 2006 in the wake of the implosion of his firm.

Nor does Rajaratnam's $10 million fine come close to the $100 million in fines that Ivan Boesky paid in his plea deal over insider-trading charges in 1986. Mr. Boesky got a reduced three-year sentence for cooperating with prosecutors.

In addition to his fine, Rajaratnam was ordered to forfeit $53.8 million in illegal gains. He begins serving his sentence Nov. 28.

In handing down the lighter-than-expected sentence, US District Judge Richard Holwell cited Rajaratnam's health problems and his charity work on behalf of numerous causes as reasons for leniency.

But Wall Street is listening.

"Wall Street has already been listening," Mr. Slotnick says. "The many good people on Wall Street want to make sure that they don't run afoul of the law."

The Rajaratnam sentence makes the point, but what will really count is continued action by the Department of Justice to pursue insider trading and other securities fraud, Mr. Mintz says.